Bitcoin For Dummies. Peter Kent
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FIAT CURRENCY?
Hang around in the Bitcoin community long enough and eventually, you’ll hear people talking about fiat currency, usually disparagingly. A fiat currency is currency by decree, by official order. A fiat currency is one that is issued by a government, without being backed by a commodity such as gold. (To quote Nobel-prize winning economist Paul Krugman, “fiat currencies have underlying value because men with guns say they do.”) Most currencies these days are fiat currencies; the “gold standard” generally fell out of favor in the 1930s, during the Great Depression. (Great Britain dropped the gold standard in 1931.) The U.S. dollar used to be pegged to silver, but in 1900, a law was passed linking it to gold. It remained linked to gold through most of the century, until being completely de-linked from gold in 1971 and becoming a fiat currency. (However, in 1934 the U.S. did devalue the dollar against gold; that is, they reduced the weight of gold per dollar.)
The advantage of fiat currency is that it gives governments more control over the money supply. Many economists, probably most, believe that adherence to the gold standard prolonged the Great Depression, as governments were not able to stimulate their economies by increasing the money supply. The disadvantage, according to many true believers in Bitcoin, is that it provides governments with too much control over the money supply!
Now, if this all sounds a little flakey, a bit like a con game — and there are certainly plenty of people who will tell you that Bitcoin is a con game — we’re going to explain in a few moments what money is. You may think you know what it is, but you probably don’t, and without understanding what money is, it’s hard to understand how Bitcoin can be money. But first, a little more about Bitcoin.
Understanding Bitcoin Units
To begin with, you need to understand that Bitcoin can be broken down and bought and sold in pieces. A Bitcoin is not like a gold coin; if you buy, for instance, a US$10 Liberty Gold Coin (for around $1,000, by the way), you’re buying the whole thing. You’re not buying half or a quarter.
But with Bitcoin, which can sell at $50,000, $60,000, or whatever per coin, most people can’t afford to buy in if they have to buy the entire thing. And in any case, there is no coin. It’s just an entry in the ledger.
So that entry in the ledger can say whatever we want it to say. It can say that you bought half a Bitcoin, or a tenth or hundredth, or a ten thousandth, all the way to a single one hundred millionth. That is, you can buy partial coins — fragments of a Bitcoin. Table 1-1 offers a quick look at Bitcoin units.
TABLE 1-1 Bitcoin Units
| Unit | Unit Name |
|---|---|
| 1; one | Bitcoin, BTC, B |
| 1/10; one tenth | deci-Bitcoin, dBTC |
| 1/1,000; one thousandth | milli-Bitcoin, millibit |
| 1/1,000,000; one millionth | micro-Bitcoin, μBTC, bit |
| 1/100,000,000; one hundred millionth | Satoshi, sat |
The table doesn’t show all the units, but these are the units you’re most likely to see and hear about. Because Bitcoins are divided into Satoshis — one hundred million Satoshis in each Bitcoin — you can divide a Bitcoin into tenths: deci-Bitcoin, centi-Bitcoin, milli-Bitcoin, micro-Bitcoin, and so on. (In fact, there is even a theoretical way to divide a Bitcoin down below the Satoshi level into milliSatoshi, using a special ancillary network called the Lightning Network, which we talk about in Chapter 4.)
Is there enough of the smallest Bitcoin unit to go around? Well, let’s take a look. There will only ever be 21 million Bitcoins; that means there will only ever be, at its maximum, 2,100,000,000,000,000 Satoshis in circulation.
Today, though, around 19 million Bitcoins are in circulation, and somewhere around 1,900,000,000,000,000 Satoshis.
With around eight billion folks living on the planet, today, about 237,500 Satoshis are in circulation per person (the number fluctuates; see the Satoshi clock at https://satoshisperperson.com/). Today, that's valued at around US$110.
To put this into perspective, roughly US$2,500 are in circulation (“M1” money supply) per person on the planet today (according to the Federal Reserve website at https://fred.stlouisfed.org/series/M1SL). That’s 250,000 cents per person, similar to the number of Satoshis.
https://strike.me/en).
Cryptocurrency or Cryptoasset?
Bitcoin is commonly described as a cryptocurrency. Is it really a currency? We would argue that it is not. We provide more detail about this in Chapter 3, but for the moment at least, you can think of Bitcoin as more like an asset than a currency. It's more like gold than dollar bills. It’s hard to spend Bitcoin, just as it’s hard to spend gold. Sure, you can do it, but it’s not always simple, and most places where you’d want to spend your Bitcoin won’t accept it.
And furthermore, why would you want to spend your Bitcoin when it might double or triple in value over the next few months? No, Bitcoin is not a true currency, though it was originally intended to be one (and perhaps in the future, it will become one).
Google and the Oxford Languages dictionary describe currency as “a system of money in general use in a particular country.” Bitcoin is certainly not a currency in, say, Europe or North America. Perhaps the only country in which it comes anywhere close to being a currency is El Salvador, the government of which launched Bitcoin as a secondary currency. But for most of us, Bitcoin is a store of value, not something we’re going to use to buy groceries.
Still, we will be talking about how you can buy and sell Bitcoin — and selling Bitcoin is, of course, essentially the same as exchanging it (you swap it in return for goods or services) — in Chapter 3.
If There Is No Bitcoin, How Can It Be Valuable?
As we write these words, anyone owning a Bitcoin can sell it for around US$48,000. But we’ve just told you there is no Bitcoin…that all there is, is a ledger stating that the Bitcoin exists, and who (which address in the blockchain) owns it. How can that possibly hold value!?
To understand that, we need to understand a little about money and how it works. As with any form of money, Bitcoin is all about belief. If enough people believe a form of money has value, then it has value. It can be exchanged for goods and services with other people who